US tells China to drop chip sales tax – or else

The US government has warned China that it must drop its 17 per cent tax on chip sales, or face the consequences. A formal complaint to the World Trade Organisation (WTO) could come in the next few days.

Speaking during a congressional hearing last week, US Trade Representative Robert Zoellick said of the duty: "If they don't stop it, we're going to take action."

China levies a 17 per cent sales tax on all semiconductor products sold in the country. However, domestic producers are eligible for a 11 per cent tax rebate, rising to 14 per cent if the products were designed as well as fabricated in China. The tax was introduced in 2000.

US chip trade body the Semiconductor Industry Association (SIA) has already claimed the tax rebate amounts to state aid outlawed by the WTO. It has asked the US government to raise the matter with the WTO. China became a WTO member in December 2001.

Crucial to any WTO investigation of the Chinese tax will be its effect on overseas suppliers. The Chinese government claims that the tax has not been detrimental to foreign chip makers.

"The tax policy has not brought substantial damages on US firms," said Guo Xiuming, an official at the Ministry of Information Industry, quoted by Chinese state-owned media. "I believe any action by the US to bring the case to the WTO will likely fail."

Essentially, China argues that since the domestic producers are so much smaller than overseas chip makers, the tax advantage has little impact on the market. Chinese bureaucracy also ensures that the rebate can take some time to arrive.

Guo Xiuming said that China may change its tax policy over time as the industry develops. The implication is that once China has a strong enough domestic industry, it will no longer need the tax break and the rebate can be reduced or even eliminated. The US government's strategy is likely to focus on the transition period, where the rebate may indeed come to have a negative effect on importers, and thus fall foul of WTO regulations.

China is also subject to the Wassenaar Arrangement, a western protocol that limits the export of technologies with potential military use to certain nations. Currently, chip making kit falls under the remit of Wassenaar with the result that domestic Chinese fabs tend to be one or more generations behind their overseas equivalents.

Chip manufacturing equipment makers want the US export rules relaxed to encourage sales into the emerging Chinese market, EE Times reports. According to trade body Semiconductor Equipment Manufacturing International (SEMI), the Chinese chip-making kit market was worth $1.16bn last year.

Relaxing the rules on chip equipment exports could be used as a bargaining tool to reduce or remove the domestic rebate on chip sales tax. ®